Applying for SBA COVID-19 relief with a criminal record in 2021
Last Updated: September 9, 2021
In December 2020, Congress authorized additional COVID-19 financial relief for small businesses and nonprofits, available through the Small Business Administration (SBA). The SBA’s two primary programs for COVID-19 financial relief are the Paycheck Protection Program (PPP), which provides forgivable loans to small businesses and nonprofits to help keep their staff employed during the crisis; and the COVID-19 Economic Injury Disaster Loan (EIDL) program, which provides advances and loans to small businesses and nonprofits that experience a temporary loss of revenue due to COVID-19.
After the first COVID-19 relief bill, the CARES Act, funded these programs in March 2020, the SBA imposed broad criminal history restrictions on applicants. In the face of pressure, the administration relaxed those restrictions several times over the course of the following months. In March 2021, the Biden Administration removed an additional restriction. In this post, we review those developments and describe the SBA’s current criminal history policies, also available on the SBA’s website (PPP and EIDL).
To summarize, as a result of developments to date, the SBA now excludes from PPP relief only a narrow category of people with a criminal record: those 1) actually incarcerated or with pending felony charges; or 2) convicted, pleaded guilty or nolo contendere to, or commenced any form of parole or probation within the last 5 years for certain financial felonies. The category of those excluded from EIDL relief is broader: 1) anyone convicted of any felony within the past five years, and 2) anyone with any sort of pending criminal charges.
We conclude with a series of recommended changes to the laws governing SBA loans that affect people with a criminal record, and to related SBA regulations and policies. These recommendations include consideration of how a loan applicant’s criminal record is treated in the rules and policies governing the SBA’s general lending programs under Section 7(a) and 7(b) of the Small Business Act, whose only mention of criminal record is to authorize the SBA to “verify the applicant’s criminal background, or lack thereof,” including through an FBI background check.
In Spring 2020, after Congress first authorized hundreds of billions of dollars for small business relief during the early months of COVID-19, the SBA, by rule and by policy, imposed unusually broad and frequently changing restrictions on applicants with an arrest or conviction history. It applied even more restrictive policies on application forms than in published regulations.
Alerted to the problem by emails from affected small business owners, we identified and described the relevant policies, and collaborated with a consortium of other organizations to persuade the SBA to roll back these restrictions. As we documented, these criminal history restrictions, neither required nor contemplated by Congress, impeded access to the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program, for small business owners, sole proprietors, and nonprofits.
Paycheck Protection Program
Facing a chorus of criticism, and the introduction of a bipartisan Senate bill to roll back most of the PPP criminal history restrictions, SBA eased some of them, in a limited fashion, on June 12. Shortly thereafter, multiple federal lawsuits were filed challenging the PPP restrictions. On June 24, SBA further relaxed them, this time in a far more significant fashion, notably making the business owners who had sued eligible.
The change came less a week before the June 30 final deadline to apply for the original round of PPP. A day before the deadline, a federal judge ruled that the SBA’s criminal history restrictions, except for the June 24 policy change, were likely unlawful. The court extended the deadline, but only for those who had sued. Shortly thereafter, Congress extended the PPP application deadline to August 8 for everyone, giving many newly eligible business owners their first opportunity to apply.
After Congress authorized a new round of PPP funding in December, the SBA reopened the program on January 11 for first-time participants, and on January 13 for certain business who are eligible to apply for Second Draw PPP Loans. The SBA’s criminal history restrictions reflecting the June 24 policy change, excluded applicants if:
An owner of 20 percent or more of the equity of the applicant is presently incarcerated or, for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for, a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year.
See Interim Final Rule on Paycheck Protection Program as Amended by Economic Aid Act (published on Jan. 14, 2021 in the Federal Register); see also FAQs for Lenders and Borrowers (effective Dec. 9, 2020). On March 3, 2021, following an announcement from the Biden White House, the SBA removed the one-year lookback restriction related to non-financial fraud felonies, consistent with bipartisan Congressional support for reducing criminal history restrictions in the Paycheck Protection Program. Therefore, the current policy excludes an applicant if:
An owner of 20 percent or more of the equity of the applicant is presently incarcerated or, for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years.
Economic Injury Disaster Loans
For most of 2020, SBA was nontransparent about its criminal history restrictions for COVID-19 Economic Injury Disaster Loans (EIDL) and advances. According to an alleged leak of documents on May 3, 2020 (which we believe was reliable), the SBA for some time had been denying applicants if they had ever been arrested, unless the arrest was for a misdemeanor and occurred more than 10 years ago. On May 20, 2020, an SBA spokesperson, without disputing the authenticity of the leaked documents, nonetheless stated that their information “is incorrect. An applicant with a felony conviction in the last 5 years would be declined.” Several months later, in an FAQ published on September 8, 2020, the SBA finally disclosed its criminal history restrictions for COVID-19 EIDL, which were broader than the May 20, 2020 spokesperson’s statement (and broader than the PPP restrictions):
Applicants [for COVID-19 EIDL] may be declined if they have been convicted of a felony in the past five years; or ever been engaged in the production or distribution of any product or service that has been determined to be obscene by a court…are currently suspended or debarred from contracting with the federal government or receiving federal grants or loans; and/or those who are presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction.
Those restrictions remained operative through at least FAQs that were effective Feb. 4, 2021. However, in new FAQs published and effective September 8, 2021, SBA incorporated the current criminal history restrictions of the Paycheck Protection Program into the COVID-19 EIDL program, replacing all previous guidance:
• Any 20% or more owner of the applicant currently incarcerated
• Any 20% or more owner of the applicant presently subject to an indictment, criminal
information, arraignment, or other means by which formal criminal charges are
brought in any jurisdiction for any felony
• Any 20% or more owner of the applicant, within the last 5 years, for any felony
involving fraud, bribery, embezzlement, or a false statement in a loan application or
an application for federal financial assistance, has 1) been convicted; 2) pleaded
guilty; 3) pleaded nolo contendere; or 4) commenced any form of parole or probation
(including probation before judgment)?
• Any 20% or more owner of the applicant, in the past year, has been convicted of a felony committed during and in connection with a riot or civil disorder or other
See FAQ Regarding COVID-19 EIDL (effective Sep 8, 2021).
Preexisting SBA 7(a) Requirements
The 7(a) statute authorizes the SBA to “verify the applicant’s criminal background, or lack thereof,” including through an FBI background check.
An SBA regulation makes ineligible “[b]usinesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude.” An SBA policy statement goes beyond this regulation to makes ineligible businesses with an Associate currently under specified forms of diversionary or conditional dispositions, order of protection, a sex offender registry, or facing any charges in any jurisdiction.
This policy statement further provides that various principals of a business “must be of good character.” (The “good character” determination requires disclosure and documentation of: 1) current charges; 2) arrests in the past 6 months; and 3) any (excluding minor vehicle violations) convictions, guilty and no contest pleas, or placement on pretrial diversion or any form of parole or probation, at any time. Expunged and sealed records must be disclosed. A person may then be approved if they have satisfied all sentencing conditions and do not have a felony conviction, misdemeanor conviction for a crime against a minor, recent misdemeanor conviction, or recent charges. Otherwise, in any of these situations, the SBA requires that they undergo an FBI fingerprint background check followed by an individual “good character” determination by the SBA.)
Along with the Justice Roundtable, we recommend that the Biden Administration and the 117th Congress make the following changes in the SBA’s Paycheck Protection Program and 7(a) Loans:
Executive Branch Proposals
- The SBA should thoroughly review and revamp its general 7(a) rules and policies to remove any exclusions based on criminal history.
- The SBA should ensure that if any criminal history restrictions remain in regulations, the restrictions in policy documents and application forms for the Paycheck Protection Program (PPP) and other loans within the general 7(a) program are no broader than the regulations require.
- Amend the Small Business Act to prohibit the SBA from excluding people from eligibility for 7(a) loan assistance based on criminal history.
- Strengthen the Paycheck Protection Program Second Chance Act (S.3865), a bipartisan Senate bill that would prohibit many criminal history restrictions for PPP relief, by removing categorical exceptions for applicants with an equity ownership of 20 percent or more who are incarcerated or were convicted of certain felonies.
Note: This post was originally posted on Jan. 21, 2021, and has been updated to reflect that on March 3, 2021, the SBA issued new rules removing a one-year look-back restriction related to non-financial fraud felonies, and that on September 8, 2021, the SBA issued new guidance for COVID-19 EIDL.
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